Hong Kong shares posted their biggest daily fall in 14 months on Tuesday and may extend losses with a worsening eurozone debt crisis and a Moody's report reigniting fears over corporate governance in Chinese companies. Questions about China Inc following controversies surrounding Sino-Forest Corp have pushed investor tolerance to a low level, with weak global equity markets adding to the prevailing risk-off mood.
"It's not really much of a surprise, the lack of transparency is something you have to deal with when you trade Chinese shares," said Kiu Ho, a trader with China Everbright Capital Management in Hong Kong.
--- Shanghai Composite down 1.7pc
The Hang Seng Index finished down 3.1 percent to 21,663.2 points, its biggest decline since the eurozone debt crisis first roiled markets last May. The Hang Seng may consolidate around 21,500, the June 2011 low, now seen by market players as a key support. Turnover on the day exceeded HK$80 billion, 14 percent above the 20-day average investors dumped shares of companies mentioned in a Moody's report warning about accounting and governance risks at dozens of small, largely non-state Chinese companies involved in the resources or property sectors.
Longfor Properties Co Ltd tumbled more than 10 percent in almost eight times its 30-day average volume, while West China Cement Ltd, which received 12 red flags from Moody's, finished down 14.1 percent, recovering from a more than 26 percent plunge earlier in the day.
The Shanghai Composite Index closed down 1.7 percent at 2,754.6 points, its biggest one-day drop in four months, breaking below its 250-day moving average for the first time in more than a week in increased turnover. "Domestic factors usually drive the mainland A-share market, but the worsening Euro debt situation is now starting to factor because it now involves Italy and Spain," said Cao Xuefeng, head of research at Huaxi Securities. "The eurozone is one of China's largest trade partners."
Heavyweight energy and financial plays were the largest drags on the Shanghai Composite, with PetroChina Co Ltd, China Shenhua Energy Co Ltd and Industrial and Commercial Bank of China losing 1.5, 3.7 and 0.9 percent respectively. Domestic names, particularly those seen as having government support for investment, outperformed significantly on the day limiting the benchmark's drop.
Water resources names gained for a second straight session on comments by President Hu Jintao over the weekend that water sector reforms would be a cornerstone of national infrastructure priorities, which analysts said was unlikely to provide more than a short-term boost to stock prices. Anhui Water Resources Development Co Ltd was up a maximum 10 percent, after a 5.1 percent gain on Monday. China Gezhouba Group Ltd, operator of massive projects along the Yangtze river, gained 2.5 percent in volume 2.6 times its 30-day average.